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Contained in the probability administration and company governance matters in the back of capital constitution judgements functional methods of settling on capital constructions have continually been mysterious and riddled with hazards and uncertainties. Dynamic paradigm shifts and the multi-dimensional operations of organizations additional complicate the location.

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To begin, we assume that maximizing enterprise value means maximizing the present value of expected NCFs. Thus, if a ﬁrm has a 90% probability of earning NCFs of $100 (outcome 1) and 10% probability of earning $70 in one year (outcome 2), the expected NCF one year from now is $97. 38; this is the enterprise value today, before the ﬁrm undertakes any risk management activities. 38), but the actual value will depend on the occurrence of outcomes 1 or 2. 23%. Let us now inspect aspects of this example.

In fact, these can allow coverage of risks that might not normally be insurable through standard mechanisms, and they may be a cost-effective way of protecting business. However, coverage can be ambiguous and the level of credit risk the company assumes necessarily rises. While these are certainly valid risk transfer mechanisms, we shall not discuss them in detail in this book. 4 OUTLINE OF THE BOOK With this brief overview of basic risk management issues, we are now prepared to consider how and why the ART market exists and the speciﬁc products, vehicles, and solutions that are available to those who actively manage their risks.

Correlation between two random variables, formally deﬁned as the covariance of the two variables divided by the standard deviation of each one,5 is measured on a scale of +1 to −1, where +1 implies perfect positive correlation and −1 perfect negative correlation; a correlation of 0 implies no relationship, indicating that the variables are independent. 7 in the other. Risk pooling reduces risks if expected losses are uncorrelated; when this occurs there is no change in the expected loss (or cost) but there is a reduction in the standard deviation.